Share Your Thoughts: Consolidating Student Loans

By Janey Osterlind on 26 October 2010 7 comments
Photo: Jan Stastny

From time to time, I receive questions from blog readers. I know that, like the “Ask the Audience” lifeline on the show Who Wants to be a Millionaire, the collective wisdom of many can often be very valuable. To that end, I have decided to periodically put these questions I receive to you, the reader. Below is one of the questions I've received recently.


Love reading your posts; they are very helpful to me on my quest to be financially free of debt. I am 23, and I graduated college two years ago. With graduation came student loan repayments. I was wondering if you know of any program or information on repaying student loans.

My issue is that I have federal and private loans that all need to be paid now, and I don't have the income to pay 3-4 separate payments a month on student loans. I was wondering if there is a way I can consolidate all my loans into one payment a month. I know I can do this for federal loans, but what about private loans, like with Sallie Mae? Any info you can provide me on this would be greatly appreciated.

Best Regards,

First, a few of my thoughts: I know C. says that he is aware borrowers can consolidate their federal loans into one payment. For others who didn’t know this, the site to get started with this process is Direct Consolidation Loans, a site by FSA. If you have federal student loans, you can benefit by consolidating them because your overall interest rate is lower. If your loans were originated after July 1, 2006, you probably won’t save much by consolidating, however, because interest rates on federal student loans made after that point are fixed. According to federal regulations, your consolidated loan will have an interest rate "based on the weighted average of the interest rates on the loans being consolidated, rounded to the nearest higher one-eighth of one percent." It is also worth noting that you will need to meet certain requirements in order to consolidate these loans, including a combined balance of more than $10,000 on your loans.

C. mentions consolidating private loans with companies like Sallie Mae. For those of you who don’t know, Sallie Mae originates the most federally insured student loans in the country, meaning that the federal government does not fund the loans (instead, Sallie Mae is a publicly traded company), but it does insure them. Unfortunately, in 2008 Sallie Mae suspended its loan consolidation programs, stating that “severe legislative cuts made by Congress made federal loan consolidation uneconomical.”

If C. is really unable to pay all of his student loans, it might be wise to explore income-based repayment plans or the Public Service Loan Forgiveness Plan (both only available with federal student loans). If all of his loans are private, he should look into extended repayment or graduated repayment options, although it is important to note that while both options could lower monthly payments, they could significantly increase the total amount a borrower has to repay. I would suggest looking into these alternative repayment plans only if he has exhausted all other means of reducing monthly expenses.

Now I’ll turn it over to you: What advice do you have for C. to lower his student loan payments? Share your thoughts!

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Guest's picture

Great post over all, but I have to point out what seems like a contradiction:

If you have federal student loans, you can benefit by consolidating them because your overall interest rate is lower.
According to federal regulations, your consolidated loan will have an interest rate "based on the weighted average of the interest rates on the loans being consolidated, rounded to the nearest higher one-eighth of one percent."

Can you clarify what you mean?

I'm in a similar situation and I also looked into loan consolidation. In my experience, (and the bulk of my loans were originated after 200) loan consolidation resulted in a slightly higher interest rate with a longer loan term. The monthly payment was half as much, but I decided this wasn't right for me.

If C. really can't make all the payments, your tips about graduated repayment and income-based payments are spot on.

But one there's thing you didn't mention! If C. can afford the payments, but is worried about forgetting to make every payment to every creditor every month, all direct loans and many private loans offer a .25% interest reduction (which isn't much, I know) for people who enroll in automatic payments. Enrolling can be tricky though. My private loan originators hid this information pretty deeply on their website. But it can be found!

For me, this is great. Every paycheck, I update Quicken and enter all the payments that I make every month. I know at the start of the month, how much of my paycheck is left.

Best of luck C., and thank you Janey!

Guest's picture

"If you have federal student loans, you can benefit by consolidating them because your overall interest rate is lower"

This was never true. Even when federal student loans had variable interest rates, your new fixed rate post-consolidation was still the weighted average of your then variable interest rates. All consolidation did at that time was change the rate from variable to fixed, which is only good if you think interest rates are going to go up.

Otherwise, NO lenders are offering "consolidation" of private student loans. This type of transaction was never really a "consolidation" but was actually a refinancing of the loans.

There is only one answer: earn more money, give said money to your lenders.

Guest's picture

Consolidation is really just refinancing.

1. As stated, it does NOT automatically lower your interest rate--it is a weighted average of the included loans. So, you may get a lower rate, or a higher rate, depending on the original loan rates.

2. You may see a lower payment, but this will be because you've extended the repayment period--in the long term, higher interest.

3. YOU WILL FORFEIT ANY 'SPECIAL' BENEFITS FROM YOUR ORIGINAL LOANS. This means you may have to give back any rebates, etc, that you received as special offers from your original lenders. Whoever you consolidate with may have some additional bonuses, but you'll have to check that carefully.

This also means you should never, ever, ever consolidate private and federal loans together. Federal loans have better options which you will lose if you roll them together with private loans.

Like mortgage refinancing, your mileage may vary. It largely depends on the specifics of your situation. Personally, I chose to consolidate my federal Stafford loans together to lock in the current interest rate, which is lower than when I took them out. The private loans I'm going to pay back under the original conditions...the only way out is through.

Janey Osterlind's picture

Lauren - thank you for pointing out my contradiction. What I meant (but didn't clearly say) was that you will benefit from consolidation by paying less in interest in some cases. Your new interest rate, however, is the weighted average of your loans. Good point, too, about enrolling in automatic pyaments - that is what I did and in my case. It's a no-brainer way to lower your interest rate, if only by a small amount. Lastly, Eva makes a very important point that consolidation means you forfeit benefits from your original loans. That is why it is supremely important to read all of the fine print, and to understand what it means in your situation, before signing on the dotted line.

Guest's picture

Something else worth noting is the control you lose over which loans you pay off. After college and grad school, I'm facing a substantial amount of debt, which is made to a number of lenders, several of whom hold more than one loan for me. Aside from the negatives to consolidation already stated, I realized that I also would lose control over where any excess payments went by consolidating. Instead, I reduced all my payments to the income-based repayment plan and created a budget that allows me to pay more than those minimums. Because I did not consolidate, that monthly amount that I pay above my minimum due towards my loans can be directed as I choose, rather than the lender or servicer, into the highest interest rate loans, allowing me to pay down faster and less than I would be if the servicers were making that choice. This might not matter for some situations, but in mine, it is making a HUGE difference. Just a thought.

Guest's picture

I am 20 years old and going into my third year of college. I am horrified by how much debt i'm going to be in when I graduate.

So, I joined Lilys List. This site doesn't instantly fix the student loan debt dilemma in America but it certainly helps. I already have $2,000 repayed from this site alone. It is relatively new, but definitely worth checking out.

I believe that every little bit counts. Whenever I have a birthday, or there is a gift-giving holiday coming up I ask my friends and family to donate to my page on lily's list rather than giving me something I won't use. Also, lily's list just started a new way to get some extra cash. They have a classifed ads section where I can post something I want to sell and if sold, the money will go directly into my account, not in my hands where I might spend it. It really helps!

Guest's picture

I've never really found anyone who would consolidate student loans. We enroll hundreds of people per day in a vast range of debt relief programs, but we never had a company who helped with these. If anyones interested in student loan leads, let me know because we just turn them down...